What is Forex Trading?

FX Trading provides an online trading platform for individuals that want to speculate on the exchange rate between two currencies. In doing so, traders buy and sell currencies with the hope of making a profit when the value of the currencies changes in their favor, whether from market news or events that take place in the world. The Forex market is the largest market in the world with daily reported volume of over $1.8 trillion, making it one of the most exciting markets for trading.

Market Hours

The spot Forex market is unique to any other market in the world; trading 24-hours a day. Somewhere around the world a financial center is open for business and banks and other institutions exchange currencies every hour of the day and night, only stopping briefly on the weekend. Foreign exchange markets follow the sun around the world, giving traders the flexibility of determining their trading day and the ability to take advantage of global economic events.

How Market Hours Work

Time Zone	New York	GMT
Tokyo Open	7:00 PM	0:00
Tokyo Close	4:00 AM	9:00
London Open	3:00 AM	8:00
London Close	12:00 PM	5:00
NY Open	8:00 AM	13:00
NY Close	5:00 PM	22:00

How a Forex Trade Works

In the Forex market you may buy or sell currencies. The objective is to earn a profit from your position. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless.

Example of How a Forex Trade Works

Trader\'s Action		Euros	US Dollars

	A trader purchases 10,000 euros in the beginning of 2001 at the EUR/USD rate was .9600.	+10,000	-9,600

	In May of 2003 the trader exchanges his 10,000 euro back into US dollar at the market rate of 1.1800.	-10,000	+11,800

	In this example, the trader earned a gross profit of $2,200.	0	+2,200

Quoting Conventions

Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the basis for the buy or the sell. For example, if you BUY EUR/USD you have bought euros (and simultaneously sold dollars). You would do so in expectation that the euro will appreciate (go up) relative to the US dollar.

Currency Abbreviations

Symbol	Definition	Symbol	Definition
EUR	Euro	NZD	New Zealand dollar
GBP	Great British pound	AUD	Australian dollar
USD	US dollar	CAD	Canadian dollar
CHF	Swiss franc	JPY	Japanese Yen

EUR/USD

In this example the Euro is the base currency and thus the basis for the buy/sell.
If you believe that the US economy will continue to weaken and this will hurt the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought Euros in the expectation that they will appreciate versus the US dollar. If you believe that the US economy is strong and the Euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold Euros in the expectation that they will depreciate versus the US dollar.

USD/JPY

In this example the US dollar is the base currency and thus the basis for the buy/sell.
If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.

GBP/USD

In this example the GBP is the base currency and thus the basis for the buy/sell.
If you think the British economy will continue to be the leading economy among the G7 nations in terms of growth, thus buoying the pound, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will appreciate versus the US dollar. If you believe the British are going to adopt the Euro and this will weaken pounds as they devalue their currency in anticipation of the merge, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.

USD/CHF

In this example the USD is the base currency and thus the basis for the buy/sell.
If you think the Swiss Franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss Franc.

Buying/Selling

First, the trader should determine whether they want to buy or sell a currency pair. If they want to enter a short order - whereby they will profit if the exchange rate falls - they simply need to click on the SELL rate. The opposite holds true for traders who enter buy orders: they can simply click on the BUY rate, and thus will profit if the exchange rate goes up.

Example of How Buying/Selling Works

Just like in all markets, there are two prices for every currency pair. The difference between these two prices is the spread, or the cost of the trade. In this example, the spread is three pips. On a mini account, a pip on the EUR/USD currency pair is worth $1. On a standard account, the value per pip is $10.

Margin

The margin deposit in Forex is not a down payment on a purchase of equity, as many perceive margins to be in the stock markets. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. FX Trading\'s 400:1 leverage allows traders to open one $100,000 standard lot with only $250 of equity, allowing them to hold a position much larger than the account value. FX Trading\'s online trading platform has margin management capabilities, which allow for this high leverage.

FX Trading does not close positions based on margin, but on equity. With our negative balance protection, your positions will be closed at either $500 of remaining equity (equity equals account balance plus or minus open positions) in a standard account or $50 of remaining equity in a mini account. This prevents clients\' accounts from losing more than their initial deposit, even in a highly volatile, fast moving market.

Example of How Margin Works

Since the trader opened 1 standard lot of the EUR/USD, his margin requirement or Used Margin is $250 [with our 400:1 leverage]. Usable Margin is the funds available to open new positions. For every $250 of equity in a standard account, a trader will be able to open one additional $100,000 standard lot.

Rollover/Premium

For positions open at 5pm EST, there is a daily rollover interest rate that a trader either pays or earns, depending on your established margin and position in the market. If you do not want to earn or pay interest on your positions, simply make sure it is closed at 5pm EST, the established end of the market day. Since every currency trade involves borrowing one currency to buy another, interest rollover charges are an inherent part of Forex trading. Interest is paid on the currency that is borrowed, and earned on the one that is purchased. If a client is buying a currency with a higher interest rate than the one he/she is borrowing, the net differential will be positive - and the client will earn funds as a result.

Getting Started

With no commitment or cost, you can open a Virtual Trading Account. The account has the full capabilities of a "real" account, including live market rates, access to real-time market analysis, and the ability to execute trades off streaming prices. The virtual account (or Demo Account) gives you the ability to learn about the forex markets and test your trading skills without any risk.

How to Trade Your Demo: Use this time to make a plan.

Choose the right currency pair. Find out based on your risk parameters, which currency is best suited for your trading style. Some may be too volatile and some to slow so decide which currency pair is most appropriate for your strategy and time frame.

Decide on how long you plan to stay in a trade. If you are an inter day trader, what is the average time of your trade- a few minutes, a couple of hours, a full day, or swing trade (couple of days to a week).

Before you enter a trade you should also have a clear exit plan. Place your stops and limits accordingly.

Know how much you are willing to risk and how much you are looking to gain. Keep track of important news and technical levels which may be tested within your time frame.